The RBA decision, which kept rates unchanged for a second straight time, was widely expected.
RBA Says Inflation is Falling but Remains Too High
The RBA statement acknowledged that inflation is falling but expressed concern that it still remains high, noting that “the board expects that it will be some time before inflation is sustainably in the target range”. The RBA projected that inflation would return to the target range of 2 to 3 percent in 2025 and to the midpoint of that range in 2026.
Australia’s inflation fell to 4.1% year-to-year in December, down from 4.3% year-to-year in November. Inflation continues to move in the right direction, but remains well above the target range and is still too high for the RBA to consider lowering interest rates.
In the RBA statement, members expressed concern about the uncertainty over the Chinese economy and conflicts in Ukraine and the Middle East. Domestically, there was also concern about the lag in the effect of monetary policy and household consumption.
Significantly, members pushed back against rate cut expectations, saying in the statement that “a further increase in interest rates cannot be ruled out”. This was a clear signal that the RBA remains hawkish even though inflation has been on the decline.
Governor Bullock used her press conference to stress that her number one priority was lowering inflation. Bullock said she understood that mortgage holders were anxiously looking for a rate cut, but inflation had to come down first and this required the RBA to continue its restrictive rate policy.
What can we expect from the RBA moving forward? The central bank is unlikely to lower rates before the second half of 2024, which should mean additional pauses until policymakers feel comfortable cutting rates. A rate hike is very unlikely unless inflation suddenly reverses directions and moves significantly higher.
Australian Dollar Slightly Higher, Stock Market Dips Lower
In the Forex market, the AUD/USD currency pair showed limited movement after the RBA decision, rising 0.20%. At the time of writing, the Australian dollar is trading at 0.6493.
The equity markets were lower following the RBA decision. The S&P ASX 200 stock market index closed on Tuesday at 7,581.60, down 44.3 points (-0.58%).
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